Frank Armstrong, CLU, CFP, and Jason Doss, arbitration attorney, have written an excellent book with chapters keyed to more than 75 free online calculators and tools at Frank's website: www.Sink-Swim.com. These are a few of the book's valuable lessons for investors:

“All too often, investors choose their advisor based solely on personality. This is a big mistake because con-artists or simply incompetent salespeople always have a likeable personality.”

“In the good old days, the entire cost and responsibility for providing retirement was assumed by the employer. – Just 15 years ago, 70% of America’s workers were covered by a defined benefit plan.”

“The standalone, employee-funded, self-directed 401(k) plan is the last step in a long progression that shifts responsibility for retirement from the employer to the employee.”

“The employee-funded retirement system—with some notable exceptions, is such a swamp that in many cases, the employee decides not to participate.

“The kindest possible interpretation of the 403(b) system is that many of the people who administer it are hopelessly inept. – The National Education Association (NEA) collected nearly $50 million in royalties in 2004 on the sale of annuities, life insurance, and other financial products.”

“The commission-crazed sales system taints the entire advice model. You can’t rely on getting either competent or objective advice there.”

“You are on your own. You must educate yourself, take responsibility for your financial future, and design and execute a viable investment plan for yourself.”

“As a rule of thumb, you should aim to put a total of 15% of your pre-tax income into a retirement plan and savings.”

“Wall Street sharks are the most vicious kind, world famous for their remorseless search for unwitting prey.”

“One definition of retirement is that over one-third of your life is without a paycheck.”

“By far the biggest risk investors face is their own behavior. Many people are financially illiterate, yet at the same time, grossly overconfident of their skills.”

“Many investors fail to match their portfolio to their risk tolerance, time horizon, and objectives. If you don’t take sufficient risk, you will never obtain any reasonable objectives. If you take too much risk, your portfolio may implode.”

“Someone is always going to beat the market. But, it’s most likely that they did so through pure dumb luck or worse yet, by taking excessive risk.”

“Investors chasing those ‘hot’ managers with their juicy returns leads to an endless cycle of buying high, selling low, and wondering why you are not making money.”

“Trading has direct and indirect costs that reliably reduce returns. It won’t matter whether you do it, or your manager does it for you. High trading reduces average returns.”

“One recent major study indicates that broker-advised clients do relatively worse in all investment types than self-directed clients. In other words, for a variety of reasons, the value of a stockbroker’s advice may be far less than zero.”

“You shouldn’t get hung up on endlessly studying whether to contribute to a Roth or traditional 401(k).” The differences in after-tax, disposable income later are not very significant for most employees.”

“Rebalance once a year. Otherwise, over time, your plan will grow so far out of balance that you won’t recognize it.”

“IRAs don’t get enough respect. They are an extremely powerful wealth accumulation vehicle for individuals or families. “

“It’s important to understand that if your tax rate remains the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA.”

“Non-Tax-Deductible IRAs? The short answer is: Don’t bother. With no tax deduction going in, and full income tax treatment coming out, you would be far better off investing in a reasonable tax-efficient index fund.”

“The Enron example provided a stark lesson in the importance of avoiding company stock in your retirement plan. Losing your job and having your 401(k) crater at the same time is the financial equivalent of the perfect storm.”

“It’s not possible to overemphasize the importance of an early start. The magic of compounding rewards is compelling for those who keep time on their side.”

“Just two index funds, like the Vanguard Total Stock Market and Total International Stock Index, provide effective, economical, tax-efficient, global equity diversification.”

“Whatever you do, don’t invest in an individual fixed or variable annuity for your retirement investment account. That’s a product that exists only to make insurance agents and stockbrokers rich.”

“Delaying retirement by just a few years can enhance benefits substantially, turning the prospect of a threadbare existence into one of abundance and security.”

“As more and more people reach the age where they contemplate early retirement, more and more unscrupulous investment salespeople come out of the woodwork to take advantage of that dream.”

“Consider liquidating personal accounts first before you tap into qualified money. – In all cases, if you have Roth IRA accounts, use them last. Roth accounts have the most favorable tax treatment both while you are alive and in your estate.”

“Just because you are a CPA doesn’t mean you know the first thing about investing.”

“Retirement plans have two equally important components: 1. Building an adequate nest egg. 2. Making the nest egg last forever. Use the www.Sink-Swim.com calculators.”

“Late in life, retirees often find that medical expenses and assisted living arrangements require additional income and resources that put their expenditures far above their pre-retirement income.”

“As a rule of thumb, you should be very comfortable with a 4% rate of withdrawal, reasonably comfortable with a 5% rate, uncomfortable with a 6% rate, and scared out of your mind with any rate higher than that.”

“There are no fewer than three cable TV networks devoted exclusively to covering the market. Listening to them will fill your head with garbage.”

“There is no credible evidence anywhere that active management can consistently add value to the investment process. In fact, the overwhelming weight of the evidence shows that it reduces returns while adding risk.”

“Let’s say that you just left college at age 22. You put $3,574 away each year and net 8%. By the time you are 62, you have your million.”

“Your first step toward financial independence is to eliminate all consumer debt and keep free of it.”

“There is an entire world of no-load, low-cost index funds that provide exposure to every market in the world. Never pay a sales load. Deal directly with a fund family like Vanguard or purchase through a discount brokerage.”

“Taxes are the biggest cost investors face. They are a dead drag on performance. Maximize use of tax-favored vehicles like IRAs and pension plans. Use tax-efficient funds with low turnover in your personal accounts. Buy and hold.”

“There are no high-return, low-risk assets. Markets are far too efficient to allow that to happen.”

“Risk management is more important than trying to increase returns. – It’s hard to impossible to beat the market, and you can destroy your portfolio in the attempt.”

“Today’s market offers a mind-boggling menu of choices to build your portfolio. Only a few of them are worth considering, and some are truly toxic.”

“Forget what Jim Cramer says. Individual stocks and bonds have no place in your portfolio. It’s delusional to believe you can beat a half billion of your closest friends in the game of trying to outguess the market.”

“Trust Wall Street to come up with a bundle of really bad ideas and toxic products for the unwary. Stay away from index-linked annuities and CDs, hedge funds, and venture capital funds.”

“I once represent a retired elementary school teacher in arbitration where $480,000 of her IRA funds were invested in a high-risk, equity-based variable annuity. The arbitrators found in her favor and awarded her $353,000.”

“Bonds provide a store of value to meet known future expenditures and to lower the risk of the portfolio. Anything they earn is a bonus.”

“A natural and painless time to rebalance is whenever there is a cash flow to the account. Whether you are depositing or withdrawing, check to see which classes are out of line and use the cash flow to move back toward perfect.”

“The game changes at retirement. Both economically and psychologically, the stakes get higher. Time is no longer on your side. With no more salary coming in, there is no way to make up for investment mistakes.”

“Although, over the long haul the market generates enormous wealth, in the short term it can get pretty ugly. Investors must assess both the probabilities and the potential consequences of their strategies.”

“The world of investment advice is dominated by sales organizations including brokerage houses, broker-dealers, insurance companies, mutual funds and banks. These firms hire salespeople to sell high-profit (for the firm) products. There is only one ethic: Sell more!”

“It is possible to get objective competent advice, but you need to know where to look. Look for a fee-only advisor that has no financial arrangement with any product provider.”

“Budgeting sounds great in theory, and someplace there is a highly disciplined ascetic monk who can stay within his budget. But, for the rest of us, there are just too many temptations. Have money direct-deposited from your payroll account into a mutual fund company.”

“The real trick is to plan and have the discipline to save. Hope is not an action plan! You and only you can make it happen.”

“You shouldn’t get hung up on endlessly studying whether to contribute to a Roth or traditional 401(k).” The differences in after-tax, disposable income later are not very significant for most employees.”

I especially like that one and thank you Taylor for posting another excellent set of "Gems" I still think you should put them all into a book and title it " The Little Book of Investment Gems"

“It’s important to understand that if your tax rate remains the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA.”

Isn't this ignoring RMD's? If you're close to the threshold, can't the RMD result in more of your SS benefit being subject to income tax, or put you into a higher tax bracket, than would have been the case otherwise? ISTM that the RMD may force a situation in which your tax rate doesn't remain the same.

Love the quote "Just because you are a CPA doesn't mean you know anything about investing".

One should add "Just because you are a CFA you are able to outsmart the market" - How many funds run by "professionals" with initials next to their names are able to consistently beat or equal the market after expenses?

“It’s important to understand that if your tax rate remains the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA.”

Isn't this ignoring RMD's? If you're close to the threshold, can't the RMD result in more of your SS benefit being subject to income tax, or put you into a higher tax bracket, than would have been the case otherwise? ISTM that the RMD may force a situation in which your tax rate doesn't remain the same.

Yes, that's true. The tradeoff, of course, is that you've paid the income taxes on your Roth contributions annually instead of having that tax money working for you in a tax-deferred account. There's no one right answer for everyone.

“It’s important to understand that if your tax rate remains the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA.”

Isn't this ignoring RMD's? If you're close to the threshold, can't the RMD result in more of your SS benefit being subject to income tax, or put you into a higher tax bracket, than would have been the case otherwise? ISTM that the RMD may force a situation in which your tax rate doesn't remain the same.

The specifics of any individual's tax situation can vary so widely from one person to another that general statements don't apply to the specific. The statement you object to is nearly a tautology which actually serves to remind that the difference between Trad and Roth is dependent on tax scenario. You are correct that SS taxation depends on income situation which may or may not cause a marginal increase in SS taxation.

I think it is a good idea for anyone approaching or in retirement to assemble a spreadsheet that projects expected expenses and sources of income accompanied by an estimated tax computation.

I always learn from Taylor's posts & I feel good to see him post more often again.

Regards

Hi Rajsx:

Thank you for your kind words.

You may be surprised to learn that Frank Armstrong is responsible for much of what I know about investing.

In the 80s and 90s I tried to read everything I could about personal investing. One day, while perusing books in the Financial Section in our Border's bookstore, a tall, handsome gentleman observed my interest and asked "What are you looking for?" I replied, "A good book about investing." He answered, "Read Capital Ideas by Peter Bernstein. He handed me the book from the shelf--and then walked away. I bought it.

It was not until several year's later that I learned the soft-spoken man in the bookstore was an advisor named Frank Armstrong--a Miami resident who is now my friend and who taught me much of what I know about investing (Frank later had his own Morningstar forum).

Early this year, Frank asked me to read a "Draft Manuscript" of his forthcoming book, The Retirement Challenge, and if I thought it worthy, to give an endorsement. After reading Frank's manuscript, this is what I sent to his publisher who placed it on the back cover of the book:

Armstrong and Doss have written a simple and understandable guide through the maze that is our financial world. If your goal is to outperform the vast majority of investors on the road to retirement, The Retirement Challenge: Will You Sink or Swim, paves the way.

“It’s important to understand that if your tax rate remains the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA.”

Isn't this ignoring RMD's? If you're close to the threshold, can't the RMD result in more of your SS benefit being subject to income tax, or put you into a higher tax bracket, than would have been the case otherwise? ISTM that the RMD may force a situation in which your tax rate doesn't remain the same.

Yes, that's true. The tradeoff, of course, is that you've paid the income taxes on your Roth contributions annually instead of having that tax money working for you in a tax-deferred account. There's no one right answer for everyone.

If both the TIRA and the RIRA are funded to the max and the tax rates
don't change, doesn't the RIRA end up larger by the amount of taxes paid
on the taxable "side fund" that the TIRA guy had from the taxes he didn't pay initially? (assuming that all funds get converted to aftertax eventually )

tfb wrote:I see several questionable statements in the quotes. the one about non-deductible IRA is flat out wrong.

The author's wrote: "Don't bother" for these primary reasons:

* Loss of capital gains treatment: Accumulation inside the IRA grows deferred, but all distributions are subject to ordinary income tax to the owner. This could double the tax on distributions when compared to the simple liquidaton of an asset held for appreciation.

* Premature distribution tax penalty: A distribution prior to age 59 1/2 may subject the owner to a 10% penalty on top of income tax on the distribution.

* Forced distributions at age 70 1/2 (with example).

* Loss of step up in basis at death. Your IRA will be subject to both estate tax and income tax.

* Accounting and reporting complications: You may not pick and choose your tax treatment when you take a distribution. Each distribution from any IRA must be pro-rated between non-deductible contributions and taxable amounts for all accounts. At best, these tax preparation complications are annoying and frustrating, At worst, they can be costly in terms of additional accountant's fees during retirement. (Read 9-Page Instructions for Form 8606--Non-Deductible IRAs)

**There is one possible reason to consider a non-tax-deductible IRA: You might want to convert it to a Roth later. However, it is most likely not worth the trouble.

*** On the other hand, if instead of a non-deductible IRA, you simply purchased a tax-managed index fund, you would have capital gains treatment, no premature distribution tax penalty, no forced distributions, better tax treatment for your estate, and simplified tax reporting--and you can put away as much as you like.

"Flat out wrong" seems a bit harsh.

It is impossible to understand the reasoning behind many of the quotes without reading the book.

I do not have enough room in my 401K's and IRA's for all my non-equity investments. A non deductable IRA works for me by allowing me to move more non-equity money from non retirement to retirement accounts. As said, there are exceptions to these rules

many Bogleheads converted their non-deductible IRAs to Roth. it remains the best way to contribute to a Roth when the income is "too high." a Roth is better than a taxable account in many ways. not worth the trouble? That is flat out wrong.

many of the disadvantages also apply to 401k accounts. I don't think the authors would use those against 401k accounts.

I always learn from Taylor's posts & I feel good to see him post more often again.

Regards

Hi Rajsx:

Thank you for your kind words.

You may be surprised to learn that Frank Armstrong is responsible for much of what I know about investing.

In the 80s and 90s I tried to read everything I could about personal investing. One day, while perusing books in the Financial Section in our Border's bookstore, a tall, handsome gentleman observed my interest and asked "What are you looking for?" I replied, "A good book about investing." He answered, "Read Capital Ideas by Peter Bernstein. He handed me the book from the shelf--and then walked away. I bought it.

It was not until several year's later that I learned the soft-spoken man in the bookstore was an advisor named Frank Armstrong--a Miami resident who is now my friend and who taught me much of what I know about investing (Frank later had his own Morningstar forum).

Early this year, Frank asked me to read a "Draft Manuscript" of his forthcoming book, The Retirement Challenge, and if I thought it worthy, to give an endorsement. After reading Frank's manuscript, this is what I sent to his publisher who placed it on the back cover of the book:

Armstrong and Doss have written a simple and understandable guide through the maze that is our financial world. If your goal is to outperform the vast majority of investors on the road to retirement, The Retirement Challenge: Will You Sink or Swim, paves the way.

The book is already at my local library. I read it last week. I saw your recommendation on the back cover.

It's worth reading. I don't think it will have a dramatic effect on most bogleheads.

“You shouldn’t get hung up on endlessly studying whether to contribute to a Roth or traditional 401(k).” The differences in after-tax, disposable income later are not very significant for most employees.”

I especially like that one and thank you Taylor for posting another excellent set of "Gems" I still think you should put them all into a book and title it " The Little Book of Investment Gems"

kaneohe wrote:If both the TIRA and the RIRA are funded to the max and the tax rates don't change, doesn't the RIRA end up larger by the amount of taxes paid on the taxable "side fund" that the TIRA guy had from the taxes he didn't pay initially?

As others have already commented, whether a TIRA or Roth IRA (or 401k) works out for you, it's not a simple decision.

Added to that is that often, these decisions need to be made at an early age, without knowledge of future tax policies, decades away.

Just to add my $.02, my wife/me have the majority of our funds in TIRA's, driven primarily by our age. TIRA's/401(k)'s were not even available till we were in our mid-30's (before that time, defined benefit - e.g. pensions were the rule, if your company had a pension plan at all).

Since I've retired, I've found that my total income taxes paid (for all taxing authorities) are greatly reduced. Part of that calculation (for us) is the fact that we paid state/local tax on our contributions from almost 30 years ago. Those retirement investments have done quite well over the long term. Having tax-deferred funds did increase our overall returns rather than a Roth in pure $$ terms (even though for us, it doesn’t matter - we did not have the Roth vehicles even available to us).

However, when we withdraw from those tax-deferred funds, we only pay the federal portion since the state/local tax was paid at the time of our employment. This means that gains over many years became “tax free” upon withdrawal in retirement. For us, that's a 4.07% reduction in taxes we don't have to pay whenever we make tax-deferred retirement fund withdrawals. Another consideration is that when we paid taxes over many years, the combined tax rate was much less than the current 4.07% (ignoring the effects of inflation).

This was also added as consideration to our calculations as to the wisdom of converting our TIRA's to Roth. Without going into the details, we found that it was not a good decision to convert, based upon our situation. I'll repeat - for us it did not make sense. You have to do your own calculations and take action (or not) based upon your personal situation.

Additionally, since the majority of our joint residual estate is going to charity (which most of the TIRA's will be part of, if we passed today), they would be tax-free to the charity, assuming the charity is tax-exempt. That means that they would have much more to continue their "good works" than if we would have paid taxes earlier. Can the law change? Of course; but then we'll also change with the law (nobody knows the future).

kaneohe wrote:If both the TIRA and the RIRA are funded to the max and the tax rates don't change, doesn't the RIRA end up larger by the amount of taxes paid on the taxable "side fund" that the TIRA guy had from the taxes he didn't pay initially?

As others have already commented, whether a TIRA or Roth IRA (or 401k) works out for you, it's not a simple decision.

Added to that is that often, these decisions need to be made at an early age, without knowledge of future tax policies, decades away......................................This was also added as consideration to our calculations as to the wisdom of converting our TIRA's to Roth. Without going into the details, we found that it was not a good decision to convert, based upon our situation. I'll repeat - for us it did not make sense. You have to do your own calculations and take action (or not) based upon your personal situation.

Additionally, since the majority of our joint residual estate is going to charity (which most of the TIRA's will be part of, if we passed today), they would be tax-free to the charity, assuming the charity is tax-exempt. That means that they would have much more to continue their "good works" than if we would have paid taxes earlier. Can the law change? Of course; but then we'll also change with the law (nobody knows the future).

Just a few comments, from my side of the fence...

- Ron

Ron,

I believe we are in 100% agreement that this Roth/TIRA decision in a complex personal decision based on individual circumstances and (often
uncertain) future tax rates.

I was just commenting on this quote in OP:
“It’s important to understand that if your tax rate remains the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA.”

Seems to me that this is true or not true depending on the assumptions

assumption 1) fund IRAs to the max

a) Roth 10 units (pay 2.5 units tax at 25% from other funds......this will show up as
a compensating taxable side fund for TIRA)
some yrs later, the Roth doubles and is then worth 20 units

b) TIRA 10 units
some yrs later, TIRA doubles, but the after tax value is only 15 units
due to 25% tax. The taxable side fund has nominally doubled
to 5 units but it is really less after tax so total value of TIRA and
side fund is 20- units which is less than the Roth by the amount of
taxes on the side fund. This difference can be significant if the
yrs of compounding and/or the appreciation rates are large.

I'm guessing that the quote in OP refers not to the assumptions in
1) of maximum funding of IRAs but to